Integra Lifesciences Holdings Corp (IART) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to the Integra LifeSciences first-quarter financial reporting conference call. As a reminder, today's call is being recorded.

At this time, I would like to turn the call over to Angela Steinway, Global Head of Strategic Initiatives and Investor Relations. Please go ahead, ma'am.

Thank you, Erica.

Good morning, and thank you for joining the Integra LifeSciences first-quarter 2016 earnings results conference call. Joining me today are Peter Arduini, President and Chief Executive Officer; and Glenn Coleman, Chief Financial Officer.

Earlier this morning, we issued a press release announcing our first-quarter financial results and updating our full-year 2016 guidance. We also posted a presentation on our website which we will reference during the call today. You can find this presentation at integralife.com under Investors, Events and Presentations, in the file named First Quarter Earnings Call Presentation.

If you would open that file up to slide 2, please reference our Safe Harbor statement covering the forward-looking statements we will make on today's call. As well, please reference the reconciliations of non-GAAP financial measures at the end of the presentation, beginning on slide 13.

And now, I will turn the call over to Pete.

Thank you, Angela, and good morning, everyone.

Turning to slide 3, let me begin with some of our financial highlights. We're off to a strong start in 2016, as our first-quarter sales increased almost 17% to $236.8 million.

Organic growth in the first quarter was nearly 9%. The momentum within our regenerative product lines remains robust, and these products once again contributed the majority of the organic growth.

Our adjusted net income grew 15% over the first quarter of 2015 to $27.6 million. Strength in our top line, and improvement in our adjusted gross margin, which achieved a record high of 69.2%, drove this growth.

Our outperformance in the first quarter was achieved despite higher selling and marketing investments, which were necessary to ensure commercial readiness for upcoming product launches. In our February earnings call, we indicated that our spending on new product introductions, licensing opportunities, and R&D pipeline projects would be front-end loaded in the year. As a result, while earnings increased year over year, we continue to balance the right level of investment in the Business to sustain long-term organic sales growth of 6% to 8% with double-digit earnings-per-share growth.

Turning to slide 4 -- some of our recent accomplishments. Following the first quarter's strong growth performance, we're raising our full-year guidance for organic growth to approximately 8%, up from our February guidance of 7%.

The integration of the Salto ankle is essentially complete. We are pleased with the progress we've made to stabilize this product transition, and expect to see growth later this year.

We also began the controlled market release of Cadence, our internally developed two-piece ankle during the first quarter. The differentiated anatomical design and streamlined surgical technique of Cadence will complement Salto's proven clinical history and revision feature.

These ankle products will enable our sales teams to offer multiple solutions as we enter one of the fastest-growing extremities markets. As a result of the progress that we've made, we now expect sales of our combined ankle portfolio to exceed $12 million for the full year.

We recently announced two exciting licensing deals as well that expand our regenerative product portfolio. Earlier this month, at the Symposium for Advanced Wound Care, we announced an agreement with Vomaris to commercialize their advanced microcurrent technology marketed under the name Integra VolTAC This product aims to mimic the body's own electrical signals to support wound healing while preventing the growth of microorganisms.

We also had a number of engaging conversations with clinicians at the conference relative to this technology. We look forward to introducing VolTAC at the outpatient wound-care clinic, as well as through our inpatient channel. VolTAC complements our portfolio of leading product offerings in burn, wound and diabetic foot ulcers.

Last night we announced an agreement to commercialize HuMend, an acellular dermal matrix derived from donated human tissue. HuMend's tensile strength and flexibility will complement our bovine-derived SurgiMend product, and provide clinicians with a choice of products for plastic and reconstructive procedures such as tendon protection, abdominal wall reconstruction, and breast reconstruction. We expect to release commercially, HuMend, in the middle of the year.

Finally, if you turn to slide 5, I'll provide a few more details on the Omnigraft launch. Since our analyst day last November, we have made significant progress towards launch of Omnigraft for diabetic foot ulcers. We received PMA approval in January, and have been optimizing our manufacturing capabilities, as well as our marketing and channel strategy.

Our sales training and medical education efforts are going well. The outpatient sales team has been trained on both PriMatrix and Omnigraft. Both channels, inpatient and outpatient, will also sell VolTAC, which can be used in a much broader set of cases, including early-stage wounds that simply need a dressing with anti-microbial benefits. This portfolio leverages our channel structure, bringing novel advanced dressings to the market.

Since receiving our PMA approval, we've participated in several industry conferences, including the Diabetic Limb Salvage Conference and the Symposium on Advanced Wound Care. Over the last few months, we've hosted over 700 healthcare professionals at our educational seminars and hands-on training courses. We've made significant progress on obtaining reimbursement for Omnigraft, and announced today that we have positive coverage decision for nearly 112 million lives, including over 90% of Medicare patients.

Our founder study on Omnigraft was the largest DFU study conducted to date, and demonstrates healing with a median of one application. Competitive substitutes can require 4 to 6 applications, on average. With only one application, Omnigraft offers a higher quality of life to patients, as well as cost savings for both the providers and the patients.

We believe Omnigraft is a great fit for the evolving healthcare environment. We expect to receive final FDA approval for our Omnigraft packaging shortly, and, with that, we'll be positioned to launch in June, slightly ahead of our original mid-July target. We look forward to providing you with additional updates in the months to come.

And with that, I'd like to turn the call over to Glenn to provide a more detailed review of our first-quarter 2016 financial results and our revised outlook for the year. Glenn.

Thanks, Pete, and good morning, everyone.

Our first-quarter sales performance came in better than we expected, driving a slightly stronger bottom-line result. Our total first-quarter reported sales were $236.8 million, up nearly 17% on a reported basis, or nearly 9% on an organic basis, with both of our global segments contributing to the strong organic growth.

Moving to our segment performance, please turn to slide 6. Sales in our Specialty Surgical Solutions segment were $151.2 million in the first quarter, representing growth of 8.5% on a constant-currency basis. Organic and reported sales both grew at approximately the same rate.

Dural Repair sales increased in the low teens, largely due to increased volumes driven by new customer wins for both DuraGen and DuraSeal. Sales in our Precision Tools and Instruments franchise increased over 7% in the first quarter, and also contributed to the strong organic growth in the Specialty Surgical segment. This quarter was particularly strong as a result of an easier comparison to the first quarter of 2015, when we were working through the integration of MicroFrance.

We also saw a continued uptick of our Mayfield 2 cranial stabilization device. Tissue Ablation sales grew low-single digits in the first quarter, while Neuro Critical Care sales were down slightly as compared to the prior year.

Overall, international sales in the segment increased approximately 10% on a constant-currency basis, as strength in Europe and Asia more than offset weakness in Latin America. Given the first-quarter outperformance and our expectations for the rest of the year, we're increasing the low end of our guidance for both organic and reported sales by 1% to a new range of 4% to 6%.

Turning to slide 7, I will discuss the results of our Orthopedics and Tissue Technologies segment, which also had a very strong quarter. Sales in this segment were $85.6 million, up 37.5% on a constant-currency basis. Organic sales increased 11%, driven by mid-teens growth in our regenerative products, which make up over 70% of sales in this segment.

Sales of TEI products were softer than we planned, as run rates for the private-label business were lower than initially forecasted. Thus, we are slightly reducing our expectations for revenue growth from TEI private label for the full year.

Sales in our Extremities franchise increased about 20% on a constant-currency basis, resulting largely from the acquisition of the Salto ankle. Excluding acquisitions, Extremities sales were roughly flat, as growth in our Titan shoulder offset declines in our lower extremities products.

As Pete mentioned earlier, we're seeing better traction with the Salto ankle than we had anticipated at the time of acquisition. This is primarily attributable to the strong clinical history of Salto, and the efforts that our sales team made to maintain and grow relationships during the transition period.

As a result, we're now expecting our total ankle arthroplasty sales to be over $12 million in 2016, an increase of several million dollars over our previous guidance. Our entry into the fast-growing ankle market, coupled with new product launches on the horizon, such as the static frame for external fixation, gives us confidence that we'll see growth in the rest of our lower extremities franchise as we exit 2016.

Overall, international sales in this segment increased about 30% in constant currency, driven by sales of TEI products in Europe and strong double-digit growth in all other major regions. For the full-year 2016, we expect reported growth in the Orthopedics and Tissue Technology segment to be between 25% and 30%, and organic growth to be between 10% and 15%, representing no change from our prior guidance.

If you'll turn to slide 8, I'll discuss the changes to our total revenue guidance. Based on our first-quarter performance, we're raising the low end of our full-year 2016 revenues by $10 million to a new range of $985 million to $1 billion, representing growth of between 11.5% and 13% on a reported basis. This guidance includes an increase in our organic growth rate to approximately 8%, up from the 7% we provided in February. We expect approximately 5% of overall growth to come from acquired products, and based upon current exchange rates, we expect a minimal tailwind from foreign currency translation.

As Pete mentioned, we're preparing to launch Omnigraft slightly ahead of schedule, now slated for June. This gives us increased confidence in the $15 million projection for total outpatient DFU sales that we previously provided. Moving to our guidance for the second quarter of 2016, we expect revenue to increase 2% to 4% on a sequential basis, with organic growth expected to be between 6% to 7% year over year.

Now, if you'll please turn to slide 9, I will review the first-quarter 2016 P&L performance and update our expectations for 2016. In the first quarter, GAAP gross margin of 64.2% increased 130 basis points from the prior year, and adjusted gross margin of 69.2% reached a record high and expanded 240 basis points. These improvements largely resulted from favorable product mix with our high gross margin regenerative products outperforming other franchises.

For the full year of 2016, we're maintaining our previous guidance, and expect GAAP gross margin to be about 64% and adjusted gross margin to be approximately 69%. We expect gross margins to be slightly lower in the second quarter before increasing later in 2016.

Moving to operating expenses, our R&D expense increased 60 basis points to 6.1% of sales in the first quarter. For 2016, we're not making any changes to our R&D guidance provided in February.

SG&A expense was 47.3% of revenues in the first quarter of 2016, an increase of 120 basis points year over year on a reported basis. On an adjusted basis, SG&A was up 150 basis points for the quarter to 44.4%. Sales and marketing expenses rose in the first quarter, as we invested in advance of the launch of Omnigraft and recorded higher commissions associated with higher sales volumes. We are raising our full-year guidance for both reported and adjusted SG&A by 50 basis points.

Our adjusted EBITDA margin was 22% in the first quarter, an increase of 50 basis points from the year-ago period. In 2016, we expect EBITDA margin expansion to occur mostly in the back half of the year as revenue increases, to bring the full-year EBITDA margin to 24%, a 180-basis-point increase over 2015.

Moving to income taxes, we are lowering our adjusted tax rate guidance to approximately 30%, in line with our first-quarter results. Based upon our strong first-quarter results and outlook for the full year, with the P&L changes that I just reviewed, we are slightly increasing the low end of our previous full-year adjusted EPS guidance by $0.03 to a new range of $3.38 to $3.50.

With regard to the second quarter, we expect our adjusted EPS to increase slightly on a sequential basis, as compared to the first quarter, as higher sequential revenue volumes will be mostly offset by a slightly lower gross margin and increased commercial investments. This EPS progression implies double-digit adjusted net income growth in the second quarter as compared to the prior year.

Turning to slide 10, first-quarter cash flow from operations was approximately $19 million. Capital expenditures amounted to almost $11 million, [from our] higher year over year, as we increased investments in orthopedic instrument sets to support our new product introductions. Trailing 12-month free cash flow conversion was about 55%, an improvement over the 49% from the prior year.

We are maintaining our guidance of $125 million to $140 million in operating cash flows, excluding the accreted interest payment associated with our convertible notes. We plan to make additional CapEx investments to upgrade manufacturing equipment and increase automation in our facilities, and thus, are raising the bottom end of our capital expenditures guidance to approximately $40 million. Our full-year adjusted free cash flow conversion of between 70% and 80% remains unchanged.

Turning to slide 11, I'll wrap up with a quick update of our capital structure as of March 31, 2016. We have a net debt of $659 million, a borrowing capacity under our existing revolver of about $585 million, and a bank leverage ratio of 3 times. Based on our strong capital structure, we have the flexibility to invest in our Business, and pursue strategic M&A opportunities to reach our long-term financial targets.

And with that, I'll turn the call back over to Pete.

Thanks, Glenn.

If you will turn to slide 12, I would like to take a few minutes reviewing our key focus areas for 2016 and beyond. With our strong performance in the first quarter, we're well on our way to achieving our 2016 financial guidance. Our Regenerative Technology products are driving organic growth and higher profitability, and we're pleased with our overall execution against our top priorities.

We're looking forward to the upcoming launch of Omnigraft, and we'll continue to advance our broader regenerative portfolio with the addition of products like VolTAC and HuMend. We take great pride in being able to provide innovative clinical solutions that make a meaningful impact to patients' lives. Our unique 3 x 3 strategy will provide clinicians with three different regenerative products through three channels, and this is a well-developed strategy positions us for our launch in June.

The new product pipeline is strong. In the first quarter, we successfully piloted the Cadence two-piece ankle. In 2016, Integra will be positioned to offer surgeons a portfolio of ankle arthroplasty products. We continue to make progress with international product registrations of our leading regenerative products, neurosurgery products and extremities portfolio, including a global launch of the Cadence total ankle system.

We have a growing R&D pipeline, a number of clinical trial opportunities to enter new markets or expand existing ones, and several large new product introductions. We're in a great position, and we're making the necessary investments in channel, clinical and marketing development in order to achieve our longer-term financial targets.

Finally, we're continuing to evaluate strategic M&A opportunities in Specialty Surgical Solutions and Orthopedics and Tissue Technologies. M&A aligned to our strategy in key business will remain a core part of our growth plans. Overall, the first-quarter performance was a great start to what we expect will be a very successful and historic year for Integra.

And with that, operator, please open the lines for questions. In an effort to accommodate everyone, we ask that you limit yourself to one question and one follow-up, after which you may rejoin the queue. Operator, you may now open the lines.

(Operator Instructions)

Travis Steed, Bank of America

Good morning. So, revenue growth came in well above what I think anyone expected in the quarter. But the flow-through to margins was somewhat limited. Just curious, were the investments in the product launches more than you thought they'd be this quarter? And can you quantify some of these different investments and do they start to fall off in the second quarter? Do we see more margin expansion?

Yes. Travis, I will comment and then, Glenn, you can talk a little bit about more of the specifics on it. I would say, no surprises from our standpoint and, as we have been discussing from the fourth quarter and on, that entering two new, completely new, markets to us; the ankle market, which is completely new with two products; and the outpatient wound care center with a major focus on reimbursement, a major focus on hands-on training and proper preparation. Now this is directly in-line as what we thought.

And again, if you think of some of those items I mentioned, we've had a lot of hands-on training with clinicians and labs, a significant amount of work that actually went into building out the rest of our commercial teams. I'd give you an example. We upgraded some of the broader sales force and really filled out all of the roles here in Q1. Even Q4 to Q1 we've had increase in actual feet on the street that we had as we exited last year.

But I feel quite good about where we are. And, really in line with what we've signaled, we still have investments to make within Q2. Those start equalizing out and decreasing as we go into the second half and that's when we start seeing more margin expansion in the second half. Glenn, I don't know what else you want to add to that.

I would reemphasize that most of the margin expansion we expect in 2016 is going to come from the back half of the year. So, in the second quarter, we're still going to have heavy investment in selling and marketing and that will kind of flatten out in the back half of the year. And then as sales ramp, we'll see much better margin expansion in Q3 and Q4.

Great.

Just to emphasize the point on the increases, when you take a look at something like Omnigraft, the largest study done -- first PMA in 15 years, a product that saves money for providers, saves money out-of-pocket to patients; we view this as really a franchise-brand opportunity. And really wanted to (inaudible) appropriately to have this as a product that can build and grow our Company for, not only the next years, but into the next decade.

And just to follow-up on gross margin, so you're over 69% this quarter and you're guiding 69% for the full year but DFU should help margins in the second half. Do you think about, what are the offsets in the gross margin line this year as well?

Yes. I would just comment and Glenn you can clarify a couple points. If you think about the growth we had in this first quarter, a lot of the core stuff came from regenerative products that we've had for quite some time that run significantly above the Company average. Omnigraft has good margins and very good margins.

But I would say our wound care products and some of our larger products that we've had for significant time even have higher levels of margin. So when you bring out VolTAC, which is above the Company average; HuMend, which is probably slightly below or at; and Omnigraft, which is above, but not as high as the other products -- that's an example of how they'll be moderate in the second half of the year.

I would say, as those products grow, and we've talked about this, we ramp up our manufacturing facility. We see the margins on Omnigraft then continuing up in the range of where we are with our, I'll call it, legacy burn and broader wound care products.

And Travis, just a couple of additional points to add. Our precision tools and instruments business is doing exceptionally well. You saw 7% organic growth this quarter; that is a lower gross-margin business, so some of that we're expecting to continue here for the remainder of the year. So from a mix perspective, that will put a little bit of pressure on our margins. And then, just keep in mind, we've still got our oncology manufacturing center ramping up; that will still be a headwind for us until we get to the end of the year. With the new product launches, as well, we'd probably see some slightly lower yields on some of those product launches initially. So that's the reason why, what you saw in the first quarter. We'll be little bit down in Q2 and then we'll come back to the 69% plus in the Q3, Q4 timeframe.

Overall, good confidence in where we are with gross margins and it's very emblematic of the products and a lot of the good work that the team has put in, in cost and yield maximization over the last few years.

Thanks for the questions.

David Lewis, Morgan Stanley

Good morning. It's actually John Demchek in for David.

Hello, John, good morning.

Pete, I wanted to start off on the upcoming DFU launch. From the commentary, it sounds like the real major step just in getting the FDA packaging approval. That sounds like you're pretty far along in the production, sales training and payor access parts. How much work is there left to do on those other parts and where are you versus your initial expectations, specifically for the amount of reimbursement that you already have lined up?

Yes, John. I think you've called it correctly. We're down to hearing back from the agency on the final wording on the package itself. We feel quite good about the insert and all of those other combined items.

Keep in mind, what we've been very cautious about, and what we think is very important is, we're not just shipping a piece of product in the box. We're actually shipping a solution that for the outpatient center of all the right types of trades that don't have to be defrosted, have shelf stability, have sterile drapes, have the stapler set up, has everything that they need. So, we've taken a lot more methodical approach and it's been great actually working with the agency on this.

I would say that we're slightly ahead of where we thought we would be with Covered Lives. We've been pleasantly surprised by the reception of both private and public payors to the quality of our data.

As I'd mentioned, it's the largest study that's been done in the space. The study shows superior capabilities for the product in a lot of aspects, but obviously, its closure rates. The median rate of one and what that actually means for cost savings to the system is resonating, but what's also resonating, we think, was payors think about this.

It's also going to resonate with the VAC committees is, in Medicare's structure, the outpatient copayment for a Medicare patient is around 20%. If you have one application of product it can be $200 to $250 out of pocket that a Medicare patient pays. If you get five or six applications, you could be paying $1200 to $1400 out of pocket versus if you used Omnigraft, it would only be $200; $1000 different, personally, to the patient.

And so I think a lot of these things are starting to resonate and, hence, approvals are coming through faster. That being said, why aren't we taking our numbers up faster? We look at this as a franchise opportunity.

[Brighting] the wound, properly training folks, not actually allowing people to buy the product until they have been certified or gone through training kind of governs the speed that we'll ramp-up; and we've talked about that, and we're really not veering off of that course. All good. But quite disciplined approach about how we want to grow the product.

Thank you. Very helpful. Just a quick follow-up, there was a stronger quarter than I would've expected in Specialty Surgical Solutions and actually, the strongest quarter that I think we've seen in some time there, including some pretty steep acceleration in the last couple of quarters. Comps get a little bit easier into the back half of the year. Is there reason why you're expecting a slowdown or is it more just the limited increases in expectations based on where we are in the year right now?

Yes. It was a great quarter by Specialty Surgical worldwide. We had the 8.5% overall growth, Dural Repair, and as Glenn commented, Precision Tools and Instruments continued to perform well.

I think the integration of MicroFrance and, if you recall, MicroFrance had a strong footprint OUS, but not as strong in the US. We're starting to make some very strong connections here in the US. And remember, the reason we wanted it was minimally invasive open neurosurgery is tied to transfenoidal and skull-based access provided by an ENT. And our neuro sales force working with some new added ENT specialists are starting to open some doors, along with new introductions.

But why we moderate the growth is because it comes back to Dural Repair. We're still growing significantly above the market; we think we're going to continue to do so, but not still not the same levels that we have been running really over the past few quarters and so we still see that moderating out, some which it has. But, at the same time, I think our brand presence, our channel coverage -- we feel quite confident that we will be able to continue to have strong growth in Specialty Surgical, just at a slightly lower clip throughout the rest of the year.

Thanks, Pete.

Raj Denhoy, Jefferey

Good morning. Trying to get a better bead on how the international business did. You gave us some detail on the currency and revenue from acquisition, but not really a breakdown on that acquisition piece. So maybe you could, so we could better figure out how you doing overseas.

Yes. I will give a high-level comment and then, Glenn, maybe you want to breakout a little bit more detail. It was a strong overall performance internationally. If you look at Asia-Pacific, we were up in the high teens. Some of our countries that we have been investing in quite a bit have continued to do well, such as China and some of the emerging market areas.

We've got a new focus on Korea, as an example, continuing to grow. Western Europe, again, some of the markets that aren't traditionally thought of as growth markets continued to do well for us as we're building out our infrastructure.

You may recall we've gone direct in instruments and multiple parts throughout Europe. We've gone direct in Italy with the acquisition of our distributor, which has enabled us then to take more products that are organically developed direct ourselves; and so Europe up in the upper teens as well.

The big soft part is in Latin America, not a whole lot different than a lot of other folks are talking about. Brazil primarily, but you've got Argentina, Mexico; there's a lot of dynamics that we think are going to be soft throughout the year. But, an overall strong performance and we're making good progress, I'd say, also on our registration strategies as well. Glenn, what did I miss?

I think in terms of the organic growth, the numbers that we put out this quarter, a lot of that came from the international side of our business. US grew little bit faster overall organically versus international but international business grew north of 7% organically and, as Pete mentioned, saw some really healthy growth coming out of Asia-Pacific and China, Japan, a nice uptick with our MAYFIELD 2 product.

Caruso is doing really well outside the US. MicroFrance continues to perform very well in Western Europe. The Latin America drop year over year was expected. We called that out in the last earnings call just given some the challenges in Brazil and Mexico.

I would say that business is performing right in line with our revised expectations, but it is down year over year. But candidly, overall, I'm very pleased with the performance of the international business for the first quarter here.

Okay. So the underlying growth was about 7% overseas?

Over 7%.

Over 7%. Okay, that's helpful. Just on extremities, you guys continue to put out very strong numbers. I'm curious if there's anything you can offer in terms of a surge in retention, now that you've acquired or are starting to integrate the Salto ankle. Anything you can offer on how Titan is doing out there. Both seems to be doing well, but if you could just offer some additional commentary.

Yes, I would start. So with shoulder, we continue to have good overall growth. Obviously, we're not in the high double digits as we were when we initially launched the product. More competition coming into the field, but more confidence in our product as more users are now expanding, as opposed from our core group as we rolled out a few years ago.

We feel quite good about the pace about where we are with overall Titan. And we've got a couple other products that are going to be coming out; one is our Glenoid solution that comes out in the middle of this year; and then a second Glenoid product that comes out later at the end of the end of this year as well. So that's running as we expect.

As Glenn commented, I think Salto has exceeded expectations; people say, gee why? When you're in the midst of a product that may get sold off, it's in the transition of an acquisition, it's challenging for the seller, for anyone, to keep confidence what's going to happen. I think as it came to us, many customers see us as a strong player within the lower market. We really committed ourselves to the product. We showed that we were going to be investing back into it, bringing more sets in, bringing more training. And then we also shared with those same customers about Cadence, not to switch them, but to have them be excited about that we're really going to be a strong player within the ankle market.

And I think that's what starting to play out now with this $12 million of revenue that we're now seeing here for the total portfolio for the year. We think that these products are matching up well.

That's doing another thing for us. We're seeing folks that do ankles which is obviously a more sophisticated procedure than fixation or some of the other forefoot/hindfoot procedures we've traditionally been a player in. It opens the door for those customers to say, let me know more about the rest of the Integra portfolio and lower.

Although we're still not where we want to be, sequentially, we've been improving on our lower performance. And with some of the new introductions and new customers coming in, we see, as we had talked about, turning the tide around lower growth, ex-ankle, going into the second half of the year. We feel quite good about the plans; shoulders, where it's at; ankle really being exceeding where we thought we would be; and our lower portfolio, right on track to the recover that we had planned for.

Great. One last one if I could, one of the questions on Omnigraft was, how would you build out this outpatient sales channel, which hadn't traditionally participated? It sounds like you've now done that. So I'm curious if you could offer something really about the size of that sales force. How much coverage do you think you have at this point to that outpatient setting? And then, also, in the context of these two licenses, that you've done, have additional products for that channel. Did you think you need more still in the outpatient wound setting or do you feel pretty good about how you're set up there?

Yes. I would first say, for launch we feel quite good about where we are with people, products, and support. So, to answer your question directly, we talk about this 3 by 3 strategy; what's really important is we have 3 channels that are out there that work together between key customers and in a healthcare ecosystem that's not discrete just by outpatient and inpatient. Most of these centers that are in outpatient are owned by a bigger group that has inpatient capabilities, they like to do broader contracting.

So we have, ready to go, our enterprise or big contracting group that's already talking to IDNs and broader wound care groups about how we can contract business. Our inpatient group, which is now over 130-some folks that sells our inpatient products, again, calls on most of the customers that do the toughest wounds that are out there. And, a few days a week, they go to the outpatient center, these doctors, and work on diabetic foot ulcers. So they know the technology that we bring, so they'll be focused on the inpatient market

And then we have now 50 representatives who we'll call specifically dedicated on the outpatient area. With that combination, Raj, we're able to really work handoffs and sounds between inpatient and outpatient. Were able to put the specific focus that is needed on those channels. And, in the case of Omnigraft, which will be an outpatient-only based product, it's really designed for that environment to give everything you need to get things done.

Relative to VolTAC, it is a product that -- it's actually very cool. We're really excited about having it; it's got some very good clinical data that Vomaris has already put in place.

As we mentioned, we are not interested to get into basic bandages and stuff. We want to have novel technologies and the fact that this has a interesting capability where it has zinc and silver deposits on the bandages; it actually, in the saline in the body, creates electrical current that reduces the ability for any types of bio burden to build up and also increases pedants in the body, which we all have, that actually helps healing.

It is really interesting and this product can play out in the inpatient as well as in the outpatient world. But what's really important for a channel, if you recall our indication on Omnigraft, you really can't sell Omnigraft for about six weeks post the disease state. So VolTAC now can be sold day one and so it really gives that channel a product that is different and we think is going to add value from the first time the patient walks in that center. And then obviously, if they need to go to advanced product, then we have that in the bag as well.

And then last on HuMend, you asked about, that won't be sold through that channel. Humend will be sold through the SurgiMend channel, which is the dedicated channel that we picked up via TEI, that calls on hernia, plastic reconstructive surgeons that do hernia and broader plastic and reconstructive work.

Human tissue solutions, in areas such as breast reconstruction, it is a $200 million to $300 million market that we haven't played in; we think it's going to be a really nice fit for us. With the right clinical studies on our bovine product and the HuMend product, we think we're one of the few players that can offer the basket of the solutions that will be needed. Again, a little bit longer play for us, it may be over the next couple years, but we think it's a really interesting growth opportunity and right in our wheelhouse.

That's great, thank you.

Larry Biegelsen, Wells Fargo

Good morning, Larry

Good morning, guys, it's actually Craig on for Larry.

Hi, Craig

Hello, Pete. I wanted to start on DFU. I wanted to see if you could help us think about or frame the longer-term Omnigraft opportunity, in terms of surgeon adoption and revenue ramp, relative to other competitive products. And more specifically, how should we think about the impact of Omnigraft one application versus multi-applications for other products? The reimbursement coverage where you stand now and how quickly that you can gain more coverage and then maybe sales force size relative to competitors.

Yes. I would say, Craig, I'm not going to, on this call, attempt to give you my view on the adoption curve and how it looks. Candidly, as we get through the next three to four months, we'll have a better view about the value committees, the adoption rate, the conversions that take place. I will tell you, though, when you think about value committees, if you have a study that's highly compelling, it's Pharma grade from a prospective, blinded standpoint; saves money for the system; saves money for the patient; and actually has extremely good healing characteristics; it's a little bit easier discussion than going in with a study that people debate if it's actually clinically relevant or not. So we feel quite good from that aspect.

I think, from a channel standpoint, 50 reps is that going to be adequate in the long run? No. It is quite adequate for what we need now. There are scenarios where you would say we may need to double that sales force in the next 18 to 24 months.

But we'll be very responsible about how we grow that. We have some metrics internally and we take a look at what an average Rep should be able to sell and carry, which I am not going to communicate now, but that's how we're looking at the algorithm around that and how we would manage that ramp up.

But I think as far as Covered Lives, I mentioned, we're kind of ahead of where we had planned, which is a good thing. That enables us to get more aggressive on where we're going to place sales representatives and put our reimbursement-type focus. We still have some work to do on the private payer side, although we've already received some private approvals already, some big names which we're quite excited about.

And also in the Veteran Affairs area, I didn't mention, but we have a smaller group of specialists and dedicated folks there as well and we expect to be full-on selling within the VA systems as well. So more to come. But we feel quite good about where we sit, our ability to ramp up, and probably most importantly, the technology that we have and its capabilities.

Yes there is a -- the negative would be, some people are paid in a fee-for-service for as many applications as they place. I would say that's changing day by day. There's more and more clinicians that clearly are salary-based or, quite frankly, want to do and choose the right technology for the patient. Again, for a patient that only needs one application, has less money coming out of their personal pocket to pay for the product and also has very high healing characteristics and, ultimately, is less expensive for the healthcare system; we just think that's a winner, not only in the long run, but with a big chunk of customers in the short run.

And that's what we'll see, how fast that adoption rate plays out because there is a healthy tension by some products, that if you put five applications on, you personally make more money as a clinician or a system, versus doing less which we think actually can have better outcomes and better cost economics in the long run. And again, we'll keep you updated and report on that as we roll the product out beginning here in June.

Great. Thanks. That's helpful. Secondly, you have a strong market position in most of your businesses. You've been showing traction with your shoulder and the ankles and I want to ask, do you feel that you have critical mass in your extremities business? And how important is size in that business? Is that one of the M&A opportunities to expand that business?

Yes. Directly, no, we don't have critical mass. I've spoken about our desire -- relevant scale, big deal. Relevance being invited to the party when bidding takes place in a consolidated market, which really means you need to be a top four or top five player, preferably a top three. We're probably in the top seven range in extremities, whereas in pretty much all the other markets we talked about we're in that either one, two or top three position. So yes, I think expanded acquisitions.

But, as importantly, real strong acceleration in organic R&D. I will tell you that we have made very good progress within our Specialty Surgical Neuro business in getting the R&D engine moving; you're going to hear more about that over the next couple of years of new products coming out.

We have made very good progress with our regenerative platform from things you've heard about from thin skin to, obviously, Omnigraft and our capabilities. Where we haven't been as effective as (inaudible) has been in metal. And I think we've got the right R&D team in place; we've got the right clinical group around it. I think we've got the right development process to be able to get products out faster.

I think Cadence is probably a first good example of a sophisticated product that's coming out, hitting its dates and looks quite promising for us. That is an area and it's an area of interest that we'll stay quite focused on.

Great. Thanks for taking the question, guys.

Thanks.

Matthew O'Brien, Piper Jaffray.

Good morning, thanks for taking the questions. Glenn, to start off with, I'm looking at guidance for Q2 and the organic number that you're putting out there is a pretty meaningful deceleration, a deceleration from what you saw here in Q1, despite easier comps. What is it, as far as pressure points, that you guys are concerned about that leads you down to that kind of level here in Q2 on the top line?

Yes. Thanks for the question, Matt. I think the key thing, for us, is Specialty Surgical and the fact that we're not expecting to see the same level of organic growth we saw in Q1 versus Q2. And again, a lot of that is coming from easy comp and Precision Tools and Instruments. Last year's first quarter, MicroFrance was an easy comp, it was a first quarter of transition post-acquisition. So, expecting 7% plus growth in that part of our business is not something we expect in Q2 or, candidly, for the rest of the year.

And then, as Pete mentioned, on the Dural Repair side, candidly, we saw a really, really strong growth quarter again and we're being a little bit cautious, relative to expectations around our ability to grow at that rate in Q2 and beyond Q2. So I'd really, highlight Specialty Surgical as the part of the business that we're not expecting to see the same level of growth as we saw here in Q1.

Okay. Fair enough. You mentioned the private-label business and TEI being a little bit softer; can you quantify what debt impact was or what you're thinking as far as some of the shortfall that you could see from that business? And then, how was the rest of TEI trending versus your expectations? And, what I'm asking is there another shoe to drop with that asset as you're integrating it?

Yes. On TEI, I think the main miss, versus the plan has been the private-level business. Candidly, when we purchased TEI, there was probably more inventory with some of our private-label partners than we initially thought; and so we're working through some of that and the run rates are lower than we had previously anticipated. It's probably to the tune of several million dollars just to give you quantification of it. I think we'll see a sequential improvement in the TEI private-label business, though, in the back half of the year.

So expecting that to kind of recover to the more normalized run rates, but the rest of the TEI business is doing well. We worked through a lot of the rep transition and turnover. We have now got the right team in place to launch Omnigraft in addition to PriMatrix and so we feel very good that TEI is going to perform in accordance with the plans for the year excluding the TEI private-label piece which, candidly, we're not expecting to fully recover this year.

The good news is other acquired products, like the Salto, are outperforming; so net we expect to be pretty much where we thought, from an overall acquisition perspective. But that's the way I look at the overall expectations for TEI and Salto. Pete, do you have anything to add?

TEI was a fabulous acquisition for us. I think its outpatient focus which helped to set us up. The SurgiMend capabilities are great. HuMend will again into the SurgiMend channel. And we've yet to talk about our pipeline that we are working on with the legacy TEI scientists and our teams, but we think we've got a really nice pipeline that you're going to see more and more organic growth come out from that product families.

We think there's some cross synergies between the two technologies, so, in the spectrum of the type of hiccups one has in integration, these are minor in the spectrum of things. And we really feel good about what our growth trajectory can look like with that capability and those technologies in Integra's hands.

Very helpful. Thank you.

Mike Feinstein, J.P. Morgan

A couple quick questions. How does Dural Repair grow low teens off of the comp in which it grew north of 20% last year? And help me understand a little bit better, Dural Repair, which is, obviously, a long-standing relatively mature business growing that strongly and the neuro instruments business declining low single digits. It would seem that, part of the advantage is having all those products together, but you've got one side of the business doing extremely well and the other side of the business struggling.

Yes Mike, it is Pete. I would say, the Dural Repair is really made up of two key products. It is our DuraGen family, which is eight different types of SKUs that are customized to different types of closure needs in the Dura; and that has been a product that has been with us for quite some time.

But we've brought out different approaches and different techniques, so to speak. We've got a suturable product; we've got a product that is actually a secure product for different types of impaired dura. And then, just a few years ago, we purchased DuraSeal which is a sealant technology that actually goes over top sutures. I would say that asset from a standpoint of how it was brought to market really wasn't optimized previously. It was owned by Covidian at the time, who didn't have a dedicated, detailing neuro channel.

So, what we have been able to do, is the combination of the two products, which complement each other, really to bring all the solutions that one needs to actually close the dura. With clinical data that we are detailing, the way a specialty Pharma Company would detail, in many cases, with the clinical evidence out there that really hasn't been done and looking at new ways to expand the market. The market has only been growing in open Dural procedures probably at about 2% to 4% and so we have been growing significantly above that.

We've been able to actually maintain our pricing through that window of time. But we would also be able to bring new users in and a lot of that has been in the increase confidence in the data that we have been able to show them. There's a lot of use of off label products, such as vibrant sealants, which just aren't as efficacious, clearly, in the head as a product like DuraSeal.

And, I think, with the right types of studies from highly reputable universities, we have been able to convince a lot more users to move over to the product. And they have been very happy with it. That's why we been able to get the kind of growth up into the high teens, the low double-digit range in the 20s.

But, we're also realists in a market that's growing 4%, we're not going to be able to grow at 20% over the long run. Even with market expansion, it's more of a high single digit grower. I've been wrong about that the last few quarters; we have been able to continue to grow at a higher level. But through 2016 that's clearly going to slow down and it has slowed down but will continue to be a growth lever faster than the Company average for a while.

You mentioned about instruments. Instruments is actually growing quite well for us right now. We're up in the upper mid-single digit range.

We've got some new launches, actually our Mayfield 2, which is sophisticated positioning device for neuro. The MicroFrance products all performing well and we see that continuing on. You alluded to this, actually we are doing detailing with our neuro channel for a lot of these specially instruments, and that is helping the growth within that product line as well.

I was talking about the critical care piece of neuro.

Okay. It's a good question on the neuro. We came out with a new product platform a couple years ago, the first new product platform we've had in over a decade. It was wildly successful. We converted our installed base, pretty much all of it. And so you had a large bolus of growth the last two years.

And now you're seeing much slower conversion, because, the folks that use those monitors -- there's not a lot of growth in the marketplace. And as we've converted them now, year over year, we're not seeing the same level of growth as we did previous years; and we pretty much had planned for that type of a decrease in growth.

Okay. And just one of the business, I'd hope you'd more time on which is the historical, which you call regenerative technology. But really that's the dermal repair business that's growing as nicely as it is. Is that what you're referencing?

When we talk about the broader regenerative for the Company, it's more typically associated with our skin portfolio as a broader chunk of the business. If you think about this, so within Specialty Surgical, we talk about Dural repair and in Dural Repair there's two regenerative products, DuraSeal and DuraGen. And then, the regenerative portfolio outside of there is skin, tendon repair, nerve repair, all of our TEI products which are obviously in burn and wound repair. That fits in that broader bucket.

Obviously, the legacy ones are the ones that Integra has made. But why we reference them in a common format is they all have gross margins that either start with an 8 or have an 8 in their number on the higher end of the scale. So the gross margin mix is extremely rich within those areas.

Understood. Very helpful. Thank you.

Steven Lichtman, Oppenheimer

Good morning, guys. Just a couple of follow-ups. First, can you talk about, Pete, in ankles how you think having the two systems in the bag helps you competitively. How are the two going to get in position relative to each other in the field as you guys are calling on accounts?

Yes, simply put, if you have one product, you are a player. If you have two, you're committed. I think the ability to have multiple systems, if you thinking about the hips and knees guys, they have of multiple systems. Why? Because not every system fits the need of each patient and, candidly, the instrumentation doesn't fit the approach of different surgeons.

We think that the credibility, and we're already seeing it, of having different systems that way makes a big difference. I think over time, as this segment grows, you're going to see that happen with other players. I think that will bear out.

Relative to positioning, again, playing off that same point, it's kind of straightforward. I think, if you think of Salto, it has the most clinical data over a decade; it has a revision feature, which is a very important component for putting in ankle in a younger patient knowing that in a decade out, you're going to need to revise that. What's the product and the approach for that?

At the same time, it has probably more instruments and is a little bit more technique dependent. The products such as Cadence was designed to have less instruments, more refinement that way, more bone sparing and also a set of different type of gating tools and the marketing guys aren't going to like this, but I'll just use a crude definition of different shimming structures, so to speak.

But you can adjust the gate on how you position the ankle. I think that becomes an important component for people who have different morphology, different types of challenges that they have, get better wear or also get better alignment of the ankle.

So, again, you have two different products that can match up to different patient needs and we just think it's a great fit. I think we've already had designs surgeons on both sides look at both ankles and really agree that it just makes a lot of sense to have it in the portfolio that way.

Got it. Make sense. Secondly, Glenn, on the tax rate, you brought it down a bit in terms of the full-year guidance. Is that a function of higher international mix and maybe what are your overall thoughts about bringing that rate down over the next several years?

Yes. The main reason why we lowered our tax-rate guidance was according to two factors. One is better income mix relative to having more income coming from low tax jurisdictions, predominantly in Ireland and the UK would be the two major countries there. And higher R&D tax credits than our initial plans.

But, longer term, we are committed to bring our tax rate down. So, absolutely, as we grow our international business, as we look at some of our tax-planning strategies, our plan is to bring our tax rate down. It is going to take us some time to bring it down meaningfully, but, clearly, you can expect us to continue to move forward and progress on a lower tax rate as we move forward.

Great. Thanks guys.

Jayson Bedford, Raymond James

Hello, Jason.

Hi, Pete. Good morning. A couple quick questions to follow-up. Within your ortho tissue and technology business, looking at the organic growth, it seems like your regenerative business is still growing quickly without any real contribution from Omnigraft. So, if you can give us a little bit more granularity on some of the drivers of this growth and comment on growth in private label?

Yes. I would say we've had, over the last few years, a major concerted effort on driving our broader legacy platform and broader wounds, in nerve repair, in tendon repair, in different types of deeper tissue, thinner tissue types of disease stage. As an example, we added a specialist group which is a dozen strong that really works with our broader sales force of over 140, those folks own nothing but the regenerative number. These reps own the number as well, so not only do you have a sales manager who is kind of managing that, you have a deep specialist who is also working with those reps and can go in and, in some cases, at an institution where it may take two to three days or even a week to get a conversion done.

A normal sales Rep probably will be intimidated by what has to happen or can't afford to spend the time there; and a specialist with other clinical help can do that. We're finding that, that approach is actually converting customers or taking existing customers and having them use a broader part of our portfolio on more cases. So we're clearly winning that leg.

Secondly, as we brought more products out. In the past few years, we brought different meshed and thinstrated products out. We brought a thin version of our product out. That's also helped quite a bit.

And now, with TEI, you can go into a TEI customer who has used the TEI product and talk about the Integra product and how it complements the different procedures. Same vice versa for an Integra customer that never used TEI. Those synergies as well are creating much stronger growth and we see that to continue. As you mentioned, even when we're launching Omnigraft because Omnigraft will call on customers that are completely separate, from what I just mentioned, for the majority of that volume, since we really don't do much in the outpatient setting today.

And Jason, I would just add relative to the private-label business, this is now a new opportunity, to a certain extent, in that we've got increased capacity with our new collagen manufacturing centers. So that opens up a whole bunch of new doors for us around selling and increasing our private-label opportunities.

And we're seeing a nice uptick in private label which report as part of our regenerative portfolio. That is also now becoming more meaningful in terms of the contributions to the business.

It's not like that line item was influenced by a big new contract or anything like that?

There's a number of new contracts that we've got as well as new contracts that we're pursuing.

I would put it this way, Jayson, is the fact that the legacy customers that we have are pretty much the legacy customers that we have at this point in time. We haven't really brought anybody new on. But what's happening is, in some cases, we've throttled back those legacy customers in previous years because we're running at 90% capacity. And now that we have significantly more capacity we can actually get them more product that they wanted, actually, years ago. And then, what Glenn is alluding to, we actually now have a funnel of new stuff that probably will be coming into the portfolio, that's not competitive with what we do at Integra but could leverage our capabilities. And we believe and forecast, on a go-forward basis over the next few years, we'll continue to see an uptick.

And again, private-label isn't a go-forward strategy for us, but it's a great optimization of the capacity that we have to get better costs, leverage that cost base and, in some cases, partner with some folks in the Pharma side or other sides on certain versions of technology that we couldn't afford or wouldn't take the risk ourselves. And so the new facility really sets us up well to be able to work on some of those partnerships that the Company really did a great job with many years ago. And then, the last five or six, we haven't had the capacity to do it, so now that's reinvigorated. Okay. That's helpful. And maybe just along similar lines, on the TEI private-label discussion, it was a little unclear. Have you lost any contracts, meaning has a relationship been severed or is the lower forecasted revenues the function of lower revenue levels at the same customers?

We have not lost any of the agreements. It's lower revenues at the same customers and Glenn commented on the fact that, I would say, just before we purchased the TEI, there were some larger volumes purchased from a couple of private-label partners that took them a little bit longer, a couple quarters to burn through that.

They're now at a, what we'd say, is, I think, a run rate where demand matches what's going on. That's how we're going to run it. We've had discussions with those partners. Those partners are committed to growing the business and we have a good relationship with them. So we feel quite good that, that will pick up and continue at this new run rate.

I also make the point that, if there was a reason to go our separate ways, the private-label products we offer are actually products that we could take direct if we needed to do so. But, at this point in time, we think the partners we have, it's going to play out well for us to stay in line with them and keeping these private-label partners. Okay. Thank you.

Matt Taylor, Barclays

Thanks for taking the question. I just wanted to ask a follow-up on the cost and margin side. You articulated a couple dynamics between the investments that you're making with the launch and differences in mix that are going to compress margins in the near-term. Could you give us a longer-term view on margins; and articulate where you are with some of the bigger programs that you focused on in the past, like ERP; and expanding your costs program in terms of consolidating plans; and help us understand the view of, not just this year, but the next couple of years?

Matt, I will take this one. Overall we're still right on track with our full-year plans to get to an EBITDA-margin number that is close to 24%. That would be a significant improvement over 2015, something to the tune of 180 basis points. And longer term, we are still committed to doing 25% plus EBITDA-margin expansion through the 2018 timeframe; so we see a path to get there.

Where we are in some of the key projects, the ERP system is winding down. I think by the end of this year we'll pretty much be complete with the ERP implementation. That doesn't mean we'll be a 100% done, but we're going to stop calling it out as any special-type charge and we'll be in the business-as-usual mode from that point forward. Relative to the plant consolidations, most of that heavy lifting is behind us.

We have a couple of things that we are working on at the moment, outside of the US, which is coming to closure here in the second quarter. But you're seeing a lot of that plant restructuring of bank consolidation from the past reflected in our improvement in gross margin. The fact that we're able to get to 69% plus gross margins is a function of the improved mix, but also the heavy lifting that took place over the past couple of years to consolidate plants. And, what we're seeing now is more productivity and efficiency coming out of our existing plants and so, that benefit is what you're seeing.

But most of that, candidly, is behind us. We've got one plant we're closing here in Q2. That move is almost complete and then everything from this point forward, I think, will be smaller in nature relative to our plans. But we're never, I'll say, done. We're always looking for opportunities to further find efficiencies and optimization throughout the Company.

The only thing I would add, Glenn, I think on, is your team of our Company with the new ERP system we have, we're starting to find ways to really get new capabilities and structures in place that can optimize how we think about customer service, about our logistics with visibility worldwide, in many cases, on inventory. So we're just kind of hitting the tip of the iceberg on leveraging those capabilities, as well. And, ultimately, running the Company more efficiently that way, we are going to be able to affect cash flow as well as profitability.

Just to put a finer point on it, for the quarter and the rest of the year, if you think about it right now, we have a sales force for outpatient that's really not selling a whole lot of product yet because we haven't launched Omnigraft. That's built in productivity, obviously, for us over the long run and we have a plant that's running less than 20% capacity to make those products. And so, this is what we've communicated since our investor day and that's right on track.

And as we fill those, that gives us great confidence that we can drive up and increase our overall margins just from those components alone. So we are right on track to where we thought we would be and I would say we're ahead of the plan, relative to new product launches and the ramp ups of where we've been. The team has just done a really great job of, not only making their dates, but exceeding their dates and setting us up well for success.

Thanks a lot for the comments.

We have no further questions. I would like to turn it back to the speakers for any closing comments.

Thank you all for your questions and taking time to listen to the call this morning. It was a good dialogue. I would like to briefly comment on a few key messages that we hit on in our prepared remarks.

First, we're executing on the 2016 financial objectives. We talked about raising our organic growth rate to 8% and increasing adjusted earnings-per-share growth. And second, we're entering the outpatient wound care market with the launch of Omnigraft in June. And we're well positioned to implement the three by three commercial strategy we talked quite a bit about. Third, we're also continuing to drive growth with new products and will be launching over seven new products in 2016.

And finally, we're committed to pursuing strategic M&A as a core part of our growth strategy. The first quarter exceeded our expectations and we're really well set up for a successful 2016. So again, thank you for listening; we look forward to speaking with all of you here in the near future. Have a nice day.

We'd like to thank everybody for their participation on today's conference call. Please feel free to disconnect at any time.